Equity investment vehicles present ETH in a way that is palatable to investors in the legacy financial system, Bitwise Chief Investment Officer Matt Hougan says.
Ether treasury and holding companies have solved Ethereums narrative problem by packaging the digital asset in a way that traditional investors understand, drawing in more capital and accelerating adoption, according to Matt Hougan, chief investment officer at Bitwise.
Hougan told Cointelegraph that Ethereum had struggled to define income-producing features for traditional financial investors until its native token, Ether (ETH), was packaged in an “equity-wrapper.” Hougan said:
If you think about the challenge that ETH has had from a valuation perspective over the last couple of years, it's that Wall Street didn't have a clean answer to why it had value. Is it a store of value？ Is it the burn mechanism？ Is that revenue？ Is it the yield on staking？ Who knows？
But if you take $1 billion of ETH and you put it into a company and you stake it, all of a sudden, you're generating earnings. And investors are really used to companies that generate earnings, he said.
The growing institutional interest in Ethereum highlights the evolution of the layer-1 smart contract blockchain from a niche internet community to an institutional-grade asset 10 years after its mainnet went live in July 2015.
Potential risks to the ETH treasury model
Hougan warned that ETH holding companies, those accumulating ETH through corporate bond sales and equity as their core business model, should carefully manage their debt and interest expense to avoid overleveraging and blow-ups.
Hougan also advised treasury companies adopting ETH in small allocations as a hedge against inflation to have a long time horizon, adding that short-term volatility might “crush” those with lower timeframes.
Ether, like all cryptocurrencies, experiences high volatility and rapid price swings. Source: TradingView
He said that basis risk, or the risk of having assets and liabilities denominated in different currencies, is also an issue these companies must contend with, as downturns in the crypto market may affect a companys ability to meet expenses.
However, he clarified that the risk of a “catastrophic unwind,” in which ETH treasury or holding companies are forced to liquidate all of their crypto to meet debt obligations, remains low due to the spaced-out maturity of corporate debt.
“I think people's image of a catastrophic unwind is wrong, even in a bad scenario. A slow, partial unwind is what would actually happen,” Hougan said.